Quiz: Do you know how to Create an Emergency Fund?

After you design and learn to stick with a monthly budget, an important next step toward financial health is setting up a solid emergency fund. Such accounts help people survive in the event of a job loss, illness, natural disaster or other emergency. Do you know how large your fund should be, or where you should keep the money? Take our quiz to see if you know the dos and don'ts of establishing an emergency fund.

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Question 1 of 10

Which of these would qualify as an emergency worth dipping into your emergency fund for?

major car repair

The main criterion for determining whether to use your emergency fund should be if the expense is a necessity or just something you want.

kitchen remodel

vacation

Question 2 of 10

What financial device do some critics say makes an emergency fund obsolete?

home equity line of credit

A home equity line of credit may allow you to write checks immediately to cover emergency expenses. They may, however, come with added fees. And if you don't own a home, this type of credit is unavailable to you.

high-limit credit cards

payday loans

Question 3 of 10

How much money should you have in an emergency account?

three months' living expenses

The idea of an emergency fund is to help you get by for a short time in the event that you lose your income or need extra cash. Three months' worth of living expenses is the recommended amount.

a quarter of your annual salary

five times the amount you spend on food each month

Question 4 of 10

Which of the following should you NOT count on when calculating your emergency costs?

You will probably spend more than you normally do.

Insurance will cover you completely.

Though insurance may cover certain costs you might incur in an emergency, you will almost certainly have increased expenses during such a time. And, you should make sure you pay for food and shelter before other expenses.

Food and shelter will likely be your biggest expenses.

Question 5 of 10

What should you do if you want to set up a large emergency fund?

Put your money in an interest-bearing account.

Especially if you are putting a larger sum in this fund, make sure you at least earn a return on the investment of this money, rather than letting it just sit around. Also, don't put your money in any form that you could not easily access during an emergency situation.

Put your money in a high-yield mutual fund.

Put your money in certificates of deposit and savings bonds.

Question 6 of 10

What is a helpful tool for starting an emergency fund?

an automatic deduction

By having a set amount automatically taken out of your paycheck each month for the emergency fund, you will not even notice that any money is gone.

piggy bank

direct deposit of your paycheck

Question 7 of 10

What type of account should you use for your emergency fund?

money market account

Ideally you should use an account that is not overly easy to access, but one that still has the liquidity you need.

checking account

ordinary savings account

Question 8 of 10

What is the risk of trying to build your emergency fund too quickly?

You might get discouraged.

By depositing a lot each month, you may have to give up on enjoying your life. This could backfire by discouraging you enough that you stop contributing to the account.

You can create a financial emergency by skimping too much.

It may be hard to find the right account to accept a large deposit.

Question 9 of 10

Why should you pay off a credit card before building an emergency fund?

because you will pay a higher rate on credit card interest than you will receive from your emergency fund account

You probably pay 12 percent interest or more on your credit card, and chances are slim to none that you'll make anything close to that percentage on your emergency fund's money market account.

to prevent yourself from getting discouraged

to use the available credit on your card as part of the emergency fund

Question 10 of 10

Why do some people argue that you should not defer 401(k) payments to build an emergency fund?

because the long-term losses you will have outweigh the benefits of having an emergency fund

Since a 401(k) fund gains interest for many years before you access it, the same amount of money can have a sizable long-term impact on your finances.